Return FraudOur Top 10 Tips to Keep Return Fraud From Impacting Your Revenue

Return Fraud: What is it? How Merchants Can Fight Back & Recover Their Revenue?

Did you know that, according to the National Retail Federation, nearly one in five purchases will ultimately result in a return?

Accepting product returns is just a natural part of operating in the retail environment. However, the same NRF data also reveals that a significant number of returns were cases of return fraud.

Return fraud occurs when customers steal from a retailer by returning items that do not qualify for a refund. This can be the result of an honest mistake on the part of the consumer. That said, an increasing number of cases involve premeditation and malicious intent, as we’ll explore below.

What is Return Fraud?

Return Fraud

[noun]/rə • tərn • frôd/

Return fraud refers to the act of returning merchandise to a retailer for a refund in violation of the merchant’s stated return policy. The merchandise may be ineligible for a refund because it was purchased from another retailer, because the item is used, or was marked as otherwise ineligible for a refund before purchase.

Return fraud happens when consumers bring an item (or items) back to you to request a refund in the form of store credit or cash. However, the return request is invalid, as the customer does not have a legitimate right to a refund for one reason or another.

There are several reasons why many merchants turn a blind eye to suspected return fraud. For instance, there’s the fact that a claim can often be your word against the cardholder's. Customers can use a lot of different excuses to claim a return. You have no definitive way of verifying their claim, though.

Even if you suspect fraud, you don’t want to risk alienating customers by making unprovable accusations. Angering customers can lead to reputational damage. Even worse, a buyer may file a chargeback to get their refund from the bank, rather than through the proper channels.

Common Return Fraud Tactics

As we mentioned earlier, it’s possible to commit return fraud innocently. A customer may not have read your return policy, or they may return the item to the wrong store by accident.

To illustrate, think about retailers that carry similar products; take home improvement suppliers like Lowes, Home Depot, and Ace Hardware, for example. These stores stock many of the same items. Without a receipt, it may be hard to prove someone didn’t purchase the item from one or another of those retailers.

That’s just one example. There are a number of tricks which buyers can use to intentionally commit theft through your returns process. A few of the more common tactics include:

Return fraud scams are not solely practiced by individuals. Large, multinational crime rings may be behind an attack, for example.

The same applies to your competition, who might use return fraud as a sabotage tactic. One may purchase a large amount of a product in your inventory, then wait for you to restock. The competitor then sends everything back and demands a refund, meaning you’re now stuck with much more inventory than you anticipated.

Many of these tricks are harder to pull off in a physical store thanks to the use of barcodes on products and receipts. That’s why return fraud is even more of a threat for eCommerce merchants.

The Cost of Return Fraud

Returns (both legitimate and fraudulent) are a significant and costly part of doing business.

Data from Appriss Retail and the National Retail Federation (NRF) indicate that consumers returned 14.5% of all merchandise they purchased in 2023. This means that merchants processed $743 billion worth of returns last year.

Of these returns, an estimated 13.7% were fraudulently obtained by scammers. In other words, merchants lost $101 billion to return fraud in 2023.

Returns are especially severe around the end-of-year holiday season. Although the six weeks between Thanksgiving and New Year’s accounts for just 11% of the calendar year, 20% of all returns — and 16.5% of all fraudulent returns — occur during this time period.

The NRF notes that consumers returned $148 billion, or 15.3%, of the $966 billion in purchases made during the 2023 holiday season. If 16.5% of those holiday returns were fraudulent, that means US merchants lost $24.5 billion to return scams just in this six-week period.

Is Return Fraud Illegal?

Yes. Like all forms of fraud, return fraud is illegal because it involves theft and deception.

Some scammers attempt to rationalize their behavior by claiming that return fraud is a victimless crime. To be clear, this is patently false. Fraudsters who perpetrate this type of scam are enriching themselves at the expense of merchants. In turn, those merchants incur unnecessary interchange fees, lose out on revenue, and suffer from the added burden of handling returned inventory.

If caught, return fraud scammers may be blacklisted from stores. Depending on the value of the fraud and the jurisdiction the fraudster is in, they may also face civil or criminal penalties that range in severity from fines or community service up to probation or imprisonment.

How to Detect Return Fraud

Combating return fraud requires merchants to employ some specialized detection tools, as well as tactics specific to pick out return fraud. Examples of these tactics include:

Top 10 Tips to Avoid Return Fraud

The steps outlined above can help you… at least to some extent. At the end of the day, though, there’s no foolproof way to “prevent” first-party fraud scams like return fraud in the same way you can screen for and block third-party fraud.

Still, many instances of return fraud can be countered by implementing best practices. This calls for a delicate balance between preventing fraud and serving customers.

With all that in mind, here are 10 simple steps you should take to avoid return fraud and minimize your risk:

Develop and implement a clear, reasonable set of parameters for returns. Your policy should be practical yet adaptable. Things to consider include:

• Expectations: Clearly define the condition in which merchandise should be returned. For instance, specify that goods should be unopened, with tags attached and invoice included.
• Time Limits: Set time limits for the return of merchandise. The time frame is usually up to 90 days for online purchases, but can vary widely depending on the product category.
• Return Shipping: For card-not-present purchases, you should specify how return shipping should be done. Include such things as acceptable carriers, packaging, and insurance requirements.
• Fees: Are there additional charges associated with the return, such as a restocking fee? Who will pay for return shipping, if necessary? Will you supply a return label on request?
• Exceptions: If certain merchandise (such as a customized item) is subject to alternate policies, be sure to thoroughly explain this difference and get confirmation from the customer prior to the sale.
• Special Circumstances: Your standard return policy may vary depending on the product category, location, currency, or other conditions. For example, international customers may require more time for returns.

More than two-thirds of online shoppers will insist on reading your return policy before deciding to buy. If customers can’t find or understand that policy, however, it might as well not exist.

Once you develop a transparent return policy, you must make sure those rules are easily accessible. This means prominently displaying the policy in as many places as possible. Your terms should be easy to find on every page of your website (including during checkout), on invoices and other customer records, receipts, and even on packaging.

In order to spot suspicious consumers, you must have the means to swiftly and accurately access historical data in order to recognize incoming threats and resolve previous hangups. So, keeping excellent records is not optional if you want to prevent return fraud or any other form of first-party fraud.

Historical data analysis can help you spot return fraudsters before they strike. For instance, you can compare cardholder information on file against the information provided, previous return requests, date and location, etc.

This data can be quite handy in helping you identify frequent return scammers, and also pinpoint which items or products that are most often targeted.

Your return policy should be firm, yet flexible.

For instance, what happens when a customer narrowly misses the cutoff date for a return or explains that they ordered the wrong item as a gift? Being flexible here is a great way to build brand equity and long-term customer loyalty.

Keep in mind one of the top reasons customers commit friendly fraud is convenience. Making your return policy as customer-friendly as possible takes away a primary incentive for cardholders to contact the bank.

Cash is still king, and can be an attractive incentive for fraudsters. If you remove the opportunity from the equation, many scammers will be deterred from trying their luck at your in-store locations.

For those customers who paid in cash, you can politely substitute cash refunds for store credit and/or exchanges, ensuring genuine customers can return things they don’t want while discouraging scammers from committing return fraud.

If leveraged properly, each return is an opportunity to create new sales and build customer relationships. Consider offering customers the option to receive a bonus if they exchange an item for store credit. For example, giving customers an extra 10% in credit over the value of the item.

This is a win-win for you and your customer. The buyer may never use the credit; in fact, over one-third of store credits are never used, with the average value of unused store credit (including gift cards) sitting at $167 per person. Even if the credit is used, the customer will often make additional purchases at the same time. They’re happy, and you’re happy.

More than four in five cases of return fraud occurred without a receipt. Only 3.6% of returns were identified as receipted return fraud. In contrast, 16.6% of all returns were non-receipted return fraud.

To take this idea one step further, you can discourage a lot of questionable returns simply by requiring identification to process returns. If a customer is who they claim to be, then providing ID to verify returns shouldn’t be a big issue.

Examples include photo identification and the payment card used to make the purchase for in-house returns. For online returns, address and zip code information, plus the last 4 digits of the payment card used, should suffice.

The entire reason to have a return policy is to deter fraud. If you’re not actively enforcing the terms laid out in your policy, can you really be surprised when they fail? A good rule of thumb here is to ensure that your employees are fully familiar with and trained to enforce your return policy when applicable.

Additionally, letting customers know the terms laid out in your policy are non-negotiable ahead of time is a wise move. You can do this at checkout by explaining the return policy highlights at the register or by requiring acknowledgment of the policy before online checkout.

Like we mentioned above, there’s a time for flexibility in refunds. However, having solid policies to fall back on is still crucial.

Return fraud is a post-transactional threat, which makes it very difficult to spot and resolve. However, you can drastically reduce your overall exposure by deploying effective solutions pre-checkout. This would improve not only your bottom line but also your reputation with banks and credit card networks.

Fraud-fighting tools like address verification, CVV validation, 3-D Secure, and fraud scoring are among the most effective options. While none are a foolproof solution against fraud on their own, these solutions are highly effective at limiting overall risk when used in tandem.

Still concerned about your ability to fight back and avoid return fraud? It may be time to call in outside assistance.

At Chargebacks911®, we create custom chargeback management strategies for merchants tailored to your company’s unique needs. Contact us today to learn how we can help you fight back against return fraud, friendly fraud, and many other threats.